P. Aoun: Are Affine Volatility Restrictions Still Costly when the Pricing Kernel is Quadratic?

August 14, 2019

I compare the quadratic kernel used by Christoffersen, Heston and Jacobs (2013) with the commonly used Rubinstein’s (1976) power pricing kernel in terms of option valuation performance. I do so in both affine and nonaffine GARCH(1,1) models. I find that, in both cases, the quadratic kernel outperforms its linear counterpart. I find no evidence that the performance gap between the affine and the nonaffine models shrinks with the quadratic kernel.